On June 10, 2015, the California Independent System Operator (“CAISO”) released a draft final proposal (the “Expanded Metering and Telemetry Options Phase 2, Distributed Energy Resource Provider”) that, if finalized, would represent an initial step towards a regulatory structure that would result in distributed energy resources (“DERs”) competing in California wholesale energy markets. DERs are resources that are physically connected to the distribution grid of an electric utility (e.g., rooftop solar, energy storage, plug-in electric vehicles, and demand response). In order for DERs to sell into the CAISO wholesale markets, they would use the distribution grid of the electric utility to deliver power to or to take power from the transmission grid. Currently, the vast majority of existing renewable resources sell their power to California’s electric utilities. Those distributed resources are compensated by electric utilities for the electricity they generate at a rate far in excess of current CAISO market prices. In addition, those resources do not have the right or the ability to sell power directly into the wholesale market. Absent the California Public Utilities Commission (“CPUC”) adopting a substantially revised regulatory structure that sorts out the thorny jurisdictional, economic and technical issues (e.g., metering and compensation for resources located behind the retail meter), the immediate impact of CAISO’s proposal may be modest at best.

Under the proposal, CAISO would create a new classification for distributed energy companies, designating them Distributed Energy Resource Providers (“DERPs”). DERPs would be allowed to aggregate resources behind certain load aggregation points in order to reach a 0.5 megawatt (“MW”) minimum threshold required to enter the CAISO market. An agreement between a DERP and CAISO, termed a “DERP Agreement,” would establish the terms and conditions under which an individual DERP would operate. Multiple aggregations could fall under the umbrella of a single DERP Agreement and the proposal also would allow the managing DERP to communicate with CAISO via a single point of contact. DERPs would be classified as scheduling coordinator metered entities for metering purposes. The CAISO has not yet proposed how the independent scheduling coordinators would meter the DERP’s aggregation of resources or how this information would be reported back to CAISO. CAISO has indicated that demand response participating in the proxy demand resource (“PDR”) and reliability demand response resource (“RDRR”) frameworks, which already allow aggregation, would continue that participation and would not be part of DERP aggregations.

There likely will be initial restrictions placed on DERP aggregations that span multiple pricing nodes. The proposal states that such aggregations may not exceed 20 MW. CAISO has indicated that this restriction will be reevaluated after an initial twelve-month period has allowed CAISO to assess DERPs’ impact on the grid. Additionally, CAISO’s proposal requires that an aggregation spanning multiple price nodes be entirely homogenous (resources fall into three modes: generation; storage; or load). This restriction will not apply to aggregations that are located within a single pricing node.

Much work remains to be done to fully integrate DERs into the grid. For example, there are at least fourteen related CPUC proceedings that impact DERs, including, among others, those that address utility Distribution Resources Plans (R.14-08-013), Residential Rate Reform (R.12-06-013), and Energy Storage Procurement Framework and Design Program (D.13‐10‐040, D.14‐10‐045) and the related Action Plan of the California Energy Storage Roadmap (R.15‐03‐011). That said, the CAISO’s proposal moves California a step closer to the energy grid of the future many are predicting. DERPs theoretically could create so-called “virtual power plants,” which would be able to compete with more traditional, utility-scale power producers. The ability of DERs to compete in wholesale markets may have the potential to attract additional capital to accelerate the deployment of clean energy technologies. For example, battery power storage companies, which already are providing cost saving services for their customers (e.g., avoiding retail demand charges), may be able to unlock additional revenue streams via the networked aggregation of their deployed battery systems. In addition, the proposal could lead to a more resilient grid and reduce the need for upgrades to distribution and transmission facilities – although the opposite may be just as likely.

Stakeholders’ reactions to the proposal were generally favorable, although many commenters requested clarifications and encouraged close coordination with the CPUC. The most contentious issue may be whether and how DERs should be allowed to serve multiple markets. For example, SolarCity, Stem, and Advanced Micro-Grid Solutions (which filed joint comments) support CAISO’s proposal, noting the importance of DERs being able to serve multiple markets (i.e., providing benefits to both the customer and the CAISO). The California Energy Storage Alliance, which also supports the proposal, is seeking further clarification on availability requirements, opining that it would not be unreasonable to allow a DER to provide non-market services at times when the resource is not required to be available to the CAISO market. But other commenters, like MelRok, oppose multi-usage as a potential loophole that would make it falsely appear to CAISO that grid benefits are occurring.

In the most extensive of the comments filed, Pacific Gas & Electric Company (“PG&E”) supported the proposal with significant qualifications that reflect the technical issues that will be most problematic to the success of the framework proposed by CAISO. PG&E explained that a customer that sought economic benefits from both electric utility net energy metering (“NEM”) tariffs and the CAISO DERP aggregation tariffs would be seeking to be compensated twice for the same resource. PG&E noted that DERs located behind-the-retail-meter that are eligible for and participating in NEM (and receive a retail rate) cannot simultaneously have the option to sell their power into the wholesale markets. PG&E recommends that CAISO’s tariff should preclude already committed resources from participating in a DERP agreement. PG&E notes that metering requirements are not fully developed in the proposal. That may prove to the most problematic issue in the framework. PG&E also points out that CAISO does not have any jurisdictional authority to reach behind-the-retail-meter DERs. Consequently, access to any behind-the-retail-meter resources cannot occur unless the CPUC has made a determination as to whether such resources should be permitted to sell into the wholesale market and, if so, how that can be accomplished in light of any existing customer tariff obligations (e.g., NEM) and interconnection contract obligations. Moreover, it may not be technically feasible to separate out any behind-the-meter resources, such as rooftop solar and energy storage, given the customer’s obligations as a retail customer.

The failure of the proposal to address the thorniest jurisdictional and technical issues suggests that CAISO implicitly acknowledges that it is not in a position to provide an answer to resolve those issues. Indeed, CAISO explicitly acknowledged that its proposed framework is a “first step” that comes with limitations.

We will continue to track the regulatory proceedings seeking to integrate DERs. Please come back for future DER posts to this blog, including an upcoming post analyzing the recent decision of the CPUC implementing significant residential rate reforms and the Distribution Resources Plans recently filed by the Investor-Owned Utilities in CPUC R.14-08-013.

The purpose of this communication is to foster an
open dialogue and not to establish firm policies or
best practices. Needless to say, this is not a substitute
for legal advice or reading the rules and regulations
we have summarized. In any particular case, you should
consult with lawyers at the firm with the most experience
on the topic. Depending on your specific situation,
answers other than those outlined in this blog may be
appropriate. Your use of this blog site alone creates
no attorney client relationship between you and Latham & Watkins LLP.
Do not include confidential information in comments or other
feedback or messages left on the Latham's Clean Energy Law Report Blog, as these
are neither confidential nor secure methods of communicating
with attorneys.

Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in France, Italy, Singapore, and the United Kingdom and as an affiliated partnership conducting the practices in Hong Kong and Japan. Latham & Watkins operates in South Korea as a Foreign Legal Consultant Office. Latham & Watkins works in cooperation with the Law Office of Salman M. Al-Sudairi in the Kingdom of Saudi Arabia.